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Growth is probably one of the most important objectives for any company, apart from survival, of course. And when we think about business development, one of the things we have to consider is the cost of acquiring new customers. (Yes, growing your business comes at a price!) It’s crucial to make sure that it doesn’t exceed the total earnings you receive from your new clients.
In the following article, I’m going to explain what customer acquisition cost (CAC) is and how to calculate it. I’ll also share a few effective tactics to keep your CAC under control.
Before we jump to the tips, I’d like to make sure that we’re clear on the definition. So, what is CAC? Let’s discuss it below.
What is Customer Acquisition Cost (CAC)?
Customer Acquisition Cost is the overall cost you pay to catch your leads’ attention and convince them to become your customers.
There are many elements that make up your CAC, including:
- Paid advertising. Depending on your business, these can be ATL/BTL campaigns, Google Ads, social media ads, sponsored posts, and other funds spent on paid media.
- Creative costs, for example, hiring an agency to design and run your campaign.
- Production costs, for instance, printing out leaflets, giving out free product samples, free trials, etc.
- Staff salaries. In most cases, the salaries you need to count into your CAC include those for your marketing and sales teams, as they’re the ones who’ll execute the campaigns.
- Technical costs. While it might not be the first expense you’d think of when it comes to your CAC, you need to factor in software development costs, setting up the necessary tools, buying or renting equipment, etc.
I’m sure this brings another question to mind:
How do you Calculate Customer Acquisition Cost?
If you want to calculate your customer acquisition cost, all you have to do is divide the overall costs spent on getting new customers by the number of clients you managed to acquire through these initiatives. For instance, let’s imagine you invested $3,200 in a marketing campaign that brought in 155 new customers; this translates into a CAC of around $20.65. Pretty simple, right?
If you want to check what the CAC of a specific campaign is, such as PPC, then you should only consider the cost of that particular initiative. It’s good practice to do so, as it helps you identify and eliminate campaigns that are ineffective. Now that you know how to calculate customer acquisition cost for your brand, let’s take a look at what a good CAC is.
How to know if you have a “good” CAC?
As with many other business investments, you need to look at the ROI. The key is to compare your CAC against Customer Lifetime Value (CLV), i.e., the entire earnings you gain from acquired customers. The general rule here is to make sure your CLV value is at least 3x higher than your acquisition costs.
For example, if you spend $250 to acquire a customer, but they leave $1,250 with your business, then you’re looking at a 5:1 ratio.
How to Reduce Your Customer Acquisition Cost — 10 Top Methods
Enough theory, let’s get down to business! I’ve selected the top ten methods you can use to keep your CAC costs on the low end. Let’s begin with the very basics:
1. Understand where your leads hang out
Before you spend money on acquiring customers, you need to know where your leads hang out in the first place. Here are a few tips:
- Go to your social media accounts. How many followers do you have on each? Even more importantly, though, how many active members can you see? Do people comment and like your posts or stories? If you’re triggering reactions from viewers on, say, Instagram, then it makes sense to post more frequently and experiment with paid ads.
- I also recommend looking at your Google Analytics to spot the channels which bring in leads and buyers. You want to spend money on a platform where you’re not “just” popular — it should be one that you get actual conversions from. I’ll discuss this more broadly further on in this piece.
With all this in mind, it’s also important to:
2. Keep an open mind for less-costly alternatives
The channels where you’re seeing the highest engagement rates or had paid ad success in the past aren’t always going to be the best for your CAC. Be sure to weigh your options!
For example, let’s assume you run a SaaS company and have just launched a new product you want to get the most (interested) eyes on. You want to attract customers through PPC ads on social media, and you’ve had previous success with LinkedIn. However, there’s one issue: you have a limited budget for this particular campaign, and you’ve calculated that LinkedIn ads are too pricey. So, what do you do? Look for a plan B.
You could, for instance, invest in platforms that are traditionally B2C but still have an active business crowd who fit your sales persona. Perhaps you’ll find that the costs-per-click are much lower there, increasing your chances of a safe CAC rate.
Now, paid channels aside, I’d like to look at how you can lower your customer acquisition rate organically:
3. Explore the potential of organic traffic
I highly recommend spending some time on checking if you can bring in customers organically. For instance, if you create educational content and it ranks highly in Google, you could witness a regular number of conversions coming from your blog. Here are a few questions worth asking yourself:
- Can you dedicate the time and resources to regularly creating SEO content?
- Are you willing to invest in working with a technical SEO specialist?
- Do you have the resources to continuously optimize your website copy?
- Are you ready to build backlinks to support your website’s domain authority?
While it takes longer to see results from organic channels, with the right strategy, they will prove more affordable than paid campaigns over the long haul.
4. Leverage the power of word-of-mouth
Happy customers make great brand advocates, as people trust reviews from clients more than paid ads. Now, here’s where it gets interesting: only 33% of brands actively collect client opinions to use them as marketing collateral. So, high chances are, your direct competition is missing out on this acquisition channel!
Dive into your CRM or talk to your Customer Support team about the most flattering opinions your brand has received so far. Reach out to these clients, asking them whether they’d agree to have their opinion used as a testimonial on your site. If your CS team knows that a client uses your product to tackle an interesting issue, then you could also ask them if they’d be willing to be featured on your site in a case study.
You could also go one step further and identify happy customers before they’ve even had the chance to express their satisfaction with your service. For this purpose, run customer satisfaction surveys via LiveChat. If you receive an overwhelmingly positive review, ask the respondent whether you could cite them on your page. As simple as that!
5. Introduce a customer referral/affiliate program
Launching a referral or affiliate program is another great way of making the most of recommendations. Depending on your business, industry, and customer base, you could consider offering them redeemable bonus points, discounts, or commission for each client they bring on board.
Here, I’d like to drop the modesty and share our very own affiliate program at LiveChat as a source of inspiration.
By creating a dedicated app, offering a competitive commission and 24/7 support for our partners, we’ve quickly become the biggest affiliate program for online communication. We also go above and beyond to make sure that the discounts and limited offers our partners share with their community are hard to walk away from. This way, it’s a win-win: our brand establishes new customer acquisition channels, all the while helping our partners in earning their commission.
This approach works for us as a SaaS company; however, if you’re in a different niche, I’m sure you’ll find plenty of other fitting affiliate program examples online!
6. Identify blockers/UX issues on your site that can hurt conversion
A high customer acquisition cost might not always be the cause of a campaign’s ineffectiveness. Sometimes, it’s due to technical issues or wrongly designed conversion paths. Let’s imagine a scenario where you’re running a PPC campaign and encouraging prospects to visit your product page to sign up for a demo. Unfortunately, it turns out that your CTA button doesn’t work, and when prospects select it, nothing happens. As a result, they leave the page without signing up. You paid for the click but no one converted due to technical errors. You can avoid such situations by using session recording software that will point out any issues early in the process and help you fix them before they escalate.
7. Dive deeper into data
Reducing customer acquisition cost starts with getting to know your leads inside out. You should learn:
- what their preferred communication channel is
- what their challenges are
- what they are trying to achieve
- what they value in a product
- and what discourages them from buying.
The latter is especially important as it will help you remove blockers, while the remaining information will give you a good idea of what you should focus on in your marketing communication. You can use different methods to collect insights about your prospects and customers, such as surveys or web analytics software like Google Analytics. Focus on the channels with the highest conversion rate, all the while eliminating those which perform poorly. Simple, yet genius!
8. Don’t stop testing
Do you know what it takes to succeed in business? It comes down to a few things, such as product-market-fit, experience, luck, but most importantly, testing! If you want to reduce your CAC you should continuously try out new ideas. Even if your current ones work well, it doesn’t mean you cannot come up with something better, right? After all, perfection doesn’t exist!
There are a variety of A/B testing tools such as Unbounce, Optimizely, and Google Optimize that will let you test different variants of your website design, copy, CTA buttons, etc. However, go beyond your website: test numerous marketing campaigns and communication channels. You might discover that while running PPC campaigns on LinkedIn brings you lots of leads, switching to Facebook can be as effective but less costly. Be sure to support all your decisions based on data instead of your gut feeling (wink, wink).
9. Improve your customer retention rate
This might seem like a no-brainer. If you want to reduce your customer acquisition cost, you should improve your customer retention rate. It’s quite logical — the longer your clients stay with you, the lower the cost of acquiring them.
There are many strategies you can use to improve retention, such as:
- Enhancing your customer experience. According to PwC, over 25% of customers will leave a brand they love after just one negative experience.
- Introducing a good onboarding program. This will help you make sure that customers know how to use your product and see value in it.
- Being available to customers. Customers have different communication preferences — some will favor live chat, others email or social media. Make sure to give them options.
There are many more tactics you can use to boost your retention rate — if you’re curious what they are, then check out our article.
10. Use marketing automation
Marketing automation, such as lead nurturing or email drips can also work well to reduce your CAC. First of all, you could use paid media channels to promote your free trial (if you offer one) or educational materials — such as an e-book — to acquire leads. And then create a set of marketing emails that will help you turn your leads into paid customers. You can send one email every few days, just make sure not to overwhelm your leads with too much communication. As mentioned earlier, it all comes down to testing.
Secondly, you can use marketing automation to look after your current customers — inform them about any product updates, promotions, and to send them birthday wishes, etc.
What is CAC and how best to acquire customers — wrap up
As I’ve discussed above, the secret sauce to a good customer acquisition cost rate is making sure you’re earning at least three times as much on your clients than what you’ve spent on winning them over. Luckily, there are a ton of methods you can use to minimize your acquisition expenses.
I recommend exploring each channel’s potential: in particular — paid media, organic traffic, customer referrals, and affiliate programs. That being said, you must also remember about offering a fantastic UX and CX, in and out. This way, you’ll make sure your customers not only love using your product, but they’ll also enjoy interacting with you as a brand. Needless to say, if you know how to acquire new clients and create a sense of awe in them, you will soon notice a spike in customer loyalty rates.
All that’s left for me to say is: good luck, and keep experimenting to find the best approach!